Finance minister Jaitley questions high interest rates on savings
Finance minister Arun Jaitley on Saturday partly blamed high returns on savings deposits as a key factor behind costly bank borrowing, hurting private investment and growth in the broader economy.business Updated: Jul 09, 2016 21:04 IST
Finance minister Arun Jaitley on Saturday partly blamed high returns on savings deposits as a key reason behind costly bank borrowing that is hurting private investment and growth in the broader economy.
While the government has kept interest rates unchanged on state-run small savings for the July-September quarter, Jaitley’s comments can be seen as a signal for banks to reduce lending rates, even if these came at the cost of marginally lower returns on savings and fixed deposits.
Businesses have been pushing for banks to lower loan rates, reduce capital raising costs and aid capacity additions.
“Whether domestic savings are only to be used by such instruments which give you a higher return and create an interest regime which is extremely costly and makes the economy sluggish, or higher returns are to be got from such instruments as funds, bonds, shares (that finance projects and economic activity),” Jaitley said.
“A lot of them have also an element of secured investment in them which can give people a very respectable return itself,” the finance minister said, arguing in favour of parking money in non-bank savings options such as pension funds.
“That’s the basis on which pension funds the world over have been functioning and I think these are areas of advances as we grow over the next several years and decades. More and more opportunities are going to come to us,” he said.
Jaitley was speaking at a function to unveil a commemorative postage stamp to mark 140 years of the Bombay Stock Exchange (BSE).
In April, India moved to a market-lined system of state-administered savings rates, announcing sharp cuts in interest earned on a range of government-run schemes including the popular public provident fund (PPF). Market rates move in tandem with government bond rates that are currently on a downward trend.
Should banks lower returns on savings and fixed deposits, the move could allow banks to pass on policy rate cuts by the central bank through lower lending rates.
Jaitley said the Indian economy will need a lot of investment for a reasonably long period to bridge the infrastructure and industrialisation deficit that has existed for decades.
Banks often point out that they are forced to offer high interest rates to customers to make it more attractive for people to park extra funds with them in fixed deposits ahead of post-office and other state-run savings schemes.
Banks, however, do not seem have fully passed on the benefits of lower returns on state-run schemes and successive cuts in Reserve Bank of India (RBI) rates.
While the RBI has cut the key policy rate by 1.5 percentage since January 2015, banks have passed on the benefit to borrowers by lowering lending rates by less than a percentage point.
Experts said the finance minister was keen that benefits of market-linked systems follow through to borrowers at a faster clip.
“Jaitley is hinting at the need of having an overall liberalized interest rate regime in the country, which will reduce the cost of funds,” DK Joshi, chief economist at Crisil, a credit rating and research firm, said.
“This would require small savings rate to be completely aligned to market rates to get rid of rigidities in interest rate structure,” Joshi said.